Faster growth is not a precondition of improved funding for public goods and services alongside a smaller state. In fact, it will tend to increase the costs of public provision. There are political debates to be had and choices to be made regarding the size and role of the state under capitalism. Shrinking the state by cutting taxes and squeezing public services can easily become socially damaging, without any economic benefit to show for it. In fact, big government can enable a degree of economic dynamism.
In recent decades, particularly since the advent of Thatcher and Reagan, the political right in many countries has made the case for tax cuts and shrinking the state a totem of policy. This has been justified in various ways. Politically and philosophically, it is claimed that allowing people to keep more of their own money supports personal freedom and choice. Economically, it is argued that tax cuts will spur private enterprise and economic growth through providing greater incentives for money-making, and that everyone will thereby be better off if the economy is larger, even if inequality is greater. Those at the top will gain more, but those lower down the scale will gain too, even if by much less. This is the professed nature of ‘trickle-down economics’.
It is also sometimes argued, in defence of policies which aim to reduce public expenditure, that the higher taxes needed to fund that spending cannot be afforded as they will stifle growth. Faster growth must come first, and increased spending on public goods and services like health, education, welfare and infrastructure can only come later, when they can be ‘afforded’, and in such a way that the ‘burden’ of taxation and public spending is kept to a minimum. This can be termed the ‘growth dividend’, in which only faster growth will allow greater public spending.
For rich countries like the US and UK, this is mostly nonsense. Comparing the share of tax and public spending in overall GDP across rich countries suggests that the size of government measured in this way is mostly a political choice. Of course it does have economic effects, but blanket arguments for shrinking the state, or indeed growing it, without a proper discussion of the role of the state in the economy and society, are highly misleading. Continue reading